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China Reserve-Ratio Cut Speculation Fueled By Outflows

Nov. 22 (Bloomberg) -- A cut to Chinese banks’ reserve requirements may be imminent after data from the central bank suggested capital outflows, Credit Agricole CIB and Guotai Junan Securities Co. said.

Data from the People’s Bank of China indicated “less liquidity in the interbank market than we had expected,” Dariusz Kowalczyk, a Hong Kong-based strategist from Credit Agricole, wrote in an e-mailed note today. “This raises the odds” of a reserve-ratio cut in November or December, he said.

Financial institutions’ yuan positions fell 24.9 billion yuan ($3.9 billion) in October, the first decline since December 2007, according to PBOC data, suggesting that capital has been flowing out of the world’s second-biggest economy. As much as $29 billion may have exited last month, estimates Guotai Junan, China’s top-ranked arranger of domestic corporate bond sales.

China’s stocks fell today, sending the benchmark index to a fifth day of losses, amid concern declining property investment and slowing demand for exports will hurt economic growth. The Shanghai Composite Index dropped 0.1 percent, capping a five-day, 4.6 percent slump.

“Hot-money” outflows are usually accompanied by monetary loosening in China, macro-economic analysts led by Wang Jin from Guotai Junan, wrote in an e-mailed note today. Banks’ reserve ratios “may be reduced any time before the end of this year,” they wrote.

Fiscal Stance

Reserve requirements for the biggest banks stand at a record 21.5 percent, according to Bloomberg data based on central bank announcements.

UBS AG economist Wang Tao wrote today that monetary easing “may not come with a big announcement or significant reserve ratio cuts.” China may “gradually let out more bank lending and increase fiscal spending” without a shift from the current “prudent” monetary policy stance, she wrote, adding that an increase in fiscal spending will boost corporate saving and add liquidity to banks.

Still, “if foreign-exchange flows continue to dry up and the draw-down of fiscal deposits is not sufficient to pump liquidity into the system,” the central bank may need to cut the reserve ratio, perhaps before year-end, Wang said.

Ardo Hansson, chief China economist at the World Bank, said today that it would be “unwise” for China to cut interest rates, when returns for savers remain negative.

Savings rates have lagged behind the inflation rate for 21 months in China. Consumer prices rose 5.5 percent last month while the benchmark one-year savings rate is 3.5 percent.

To contact the reporter on this story: Li Yanping in Beijing at yli16@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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